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Malhotra Draws a Clear Line: Look Through or Act, Depending on What Comes Next
Malhotra said that India is accustomed to experiencing regular supply shocks.
At such times, the RBI normally tries to look through the first-round effects if it believes the shock to be temporary in nature and likely to disappear very soon.
However, Malhotra also stated that the RBI is being flexible in its approach and that it would take action in case the shock proves to be entrenched.
He said: “If it is entrenched, we need to take action.” The ongoing conflict in West Asia has driven Brent crude prices above $107 per barrel, marking an increase of 45% since the war broke out on February 28.
According to Malhotra, the RBI has maintained a neutral stance ever since June 2025. Such an approach ensures that the central bank remains nimble enough to take actions depending on the evolving situation.
A neutral stance means no changes in interest rates in the short-term, but an extended period of oil price shocks might compel the RBI to act at or after the June MPC meeting.
Over the long run, the three-quarter sufficiently long target horizon provides the central bank with enough flexibility in dealing with transmission issues under uncertain conditions.
Sustained inflation above the 6% tolerance ceiling for three consecutive quarters shall amount to a policy failure.
The table below highlights the major economic indicators being monitored by the RBI as it evaluates whether the current supply shock is short-lived or significant enough to require monetary policy intervention.
4.6%
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Next MPC meeting
Inflation in India increased slightly to 3.48% in April from 3.40% in March, and was below expectations on account of the absorption by the government of increased crude prices.
Although there has been an oil shock, the rate still stays comfortably within the RBI’s target of 2% to 6%.
Now, for the many Indians with mortgage, auto, and business loans, the MPC June meeting holds significant importance.
Malhotra said that if there is a prolonged period of conflict in West Asia, the government will gradually pass on fuel price hikes, as the excise duties can accommodate only so much.
An increase in fuel prices means a hike in household expenses and, therefore, may affect food, transport, and service prices.
However, as Malhotra pointed out, it depends on the persistence and generalisation of inflation. Fortunately for consumers, April's low CPI number provides some respite.
The consumers must be cognizant of the fact that the RBI rate-cutting phase, which provided a cumulative reduction of 125 basis points in 2025, might be halted sooner than anticipated.
According to Malhotra, the flexible inflation targeting framework may be insufficient when dealing with a shock of this magnitude.
The point he was making is that coordination between fiscal and monetary policies becomes very important in light of the current supply shock.
It is a clear admission that the RBI needs help to deal with this situation.
In addition, he suggested that monetary policy would have to remain flexible. The reason is that at the time of the April review, the situation was different.
The debate among market economists is focused on whether the June MPC keeps interest rates unchanged or gives a hint about tightening.
Everything will depend on how crude oil prices behave over the next three weeks.
It is safe to say that the message of the RBI in Switzerland is calm but tough. In case of a transitory shock, the RBI will not react. But in case of a persistent one, they will take measures. India's June MPC becomes one of the most important policy events of the year.
What is the rationale behind the RBI Governor's statement that the UPI will not be able to operate for free forever, and how will this impact the sustainability of a digital payment system in India?
The RBI Governor pointed out that despite the Unified Payment Interface (UPI) transactions being free for consumers, the system entails huge costs incurred due to server management, cybersecurity, and settlement systems.
How much transparency should one expect from Sanjay Malhotra, the new Governor of the Reserve Bank of India (RBI)?
With Sanjay Malhotra as the Governor of the RBI, one can expect a lot of data-driven transparency and communication-based monetary policy.
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